Germany's Daube Says Investors Are `Fascinated by Safety,' Boosting Bunds
Bond investors are “fascinated by safety” amid concern the global economic recovery is stalling, and that’s driving demand for German securities, according to Carl Heinz Daube, the head of the government’s debt agency.
Insurance companies looking for a guaranteed stream of income are also behind the rally in the nation’s longer-dated securities, he said. Both the 10-year bund yield and the 30-year yield dropped to record lows today, according to generic data compiled by Bloomberg. Gains for the securities may have little to do with concern that German price growth may slow, he said.
“Investors are fascinated by safety and liquidity in this environment of high uncertainty, and they are willing to pay premiums for our bonds,” Daube, managing director of the Federal Finance Agency, said in a telephone interview yesterday. “If you look at the picture of economic developments, our figures look pretty good, although the global picture is quite mixed. I don’t see a clear trend.”
Concern that austerity measures will slow European economies as the U.S. recovery shows signs of waning has helped German government debt outperform U.S. and U.K. securities this year. German bonds posted an 8.9 percent profit in 2010, compared with 8.6 percent for gilts and 8.4 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
While the Bundesbank raised its growth forecast for the nation yesterday, U.S. data showed the number of people claiming unemployment benefits rose and a manufacturing gauge declined.
Insurance Companies
“Demand for longer-dated bonds may also been driven by demand from the insurance industry,” Daube said. “In Germany, I understand that there’s a minimum interest rates these companies have to guarantee for their policy holders.”
Insurance companies in Germany guarantee a minimum interest rate of 2.25 percent for their new contracts, according to David Schnautz, a strategist at Commerzbank AG in London. The 10-year bund yield fell to 2.262 percent today while the 30-year yield slid to 2.888 percent.
The debt agency may hold off selling dollar-denominated bonds and 30-year index-linked securities, according to Daube. The last time Germany sold dollar bonds was in September.
“As of today, there’s no cost advantage for us to issue such securities,” he said.
Inflation Outlook
Investors have lowered their outlook for inflation across the world on speculation austerity programs introduced to reduce budget deficits will lower growth.
The U.S. 30-year breakeven rate, a gauge of market inflation expectations derived from yield differences between regular and index-linked bonds, has fallen to 1.90 percentage points from 2.19 percentage points at the end of the second quarter. The French 20-year rate declined to 2 percentage points from 2.3 percentage points at the end of June. French index- linked bonds are considered the region’s benchmark.
Germany has no plans to take advantage of record low yields by prefunding, or issuing more bonds than needed this year to finance next year’s budget.
“We have a clear legal structure that doesn’t allow us to prefund,” said Daube, a former banker at HSH Nordbank AG. “We stick to our issuance calendar and I think that’s good.”
Germany will sell 317 billion euros ($403 billion) of debt this year, less than an original plan to sell 338 billion euros of debt, according to the 2011 draft financing plan, obtained this week by Bloomberg News. It will issue 320 billion euros of bonds and bills next year, the document shows.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
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